It’s been an explosive week for pharmaceuticals in the news media. An industry whose most exciting news is generally relegated to academic journals and below-the-fold stories on CNBC found itself at the center of public scrutiny and outcry thanks to the New York Times’ story last Sunday, on Turing Pharmaceuticals and CEO Martin Shkrelis’ decision to raise the price of their drug Daraprim by over 5000%. Immediately, Shkreli was denounced as a heartless, opportunistic price gouger leveraging patients’ desperation to bleed them dry.
Daraprim is an anti-protozoal medication, primarily prescribed in the US to AIDS and cancer patients in order to control comorbid toxoplasmosis infections. This bacteria infects around 60 million Americans, but those with a healthy immune system experience no symptoms of disease. In immunocompromised patients, however, it can lead to death. A month ago a single dose of Daraprim cost less than $15; with Turing’s announcement that price jumped to $750.
Daraprim was exclusively available from pharmaceutical giant GlaxoSmithKline until 2010. CorePharma purchased exclusive marketing rights to the product, though at least at the time of the sale GSK was still “also involved in the Daraprim supply chain.” CorePharma eventually passed the rights to Impax Laboratories, who sold Daraprim to Turing this August for $55 million.
While follow up coverage of the story focused on Shkreli’s $750-price hike the drug’s two previous owners had already used their position as sole supplier to hike the drug’s price from around one dollar per pill to $13.50 at the time Turing acquired it:
“According to IMS Health, which tracks prescriptions, sales of the drug jumped to $6.3 million in 2011 from $667,000 in 2010, even as prescriptions held steady at about 12,700. In 2014, after further price increases, sales were $9.9 million, as the number of prescriptions shrank to 8,821.”
So Shkreli and Turing’s 5000% price increase came on top of a more than 10x price increase by the prior two rights holders.
Public outrage immediately focused on Shkreli himself. As soon as the Daraprim story had dropped he took to Twitter to defend himself. Smug, dismissive, combative, and insulting, his Twitter persona was custom made to offend his critics. Digging into his history only exacerbates his PR problem: While he was at the helm, Shkreli’s last company — currently suing him for misuse of funds — notoriously raised the price of $1.50 kidney medication Thiola by 20x. He also allegedly threatened to leave a former employee’s entire family homeless. He’s an easy man to villainize.
Identifying Turing with its CEO seems reasonable, as it’s little more than a holding company built to own Daraprim. Only formed this February, Turing offers only two products: Daraprim and a generic hypotension drug. There’s no indication that Turing is doing anything more than reselling Daraprim still sourced from CorePharma’s “supply chain”, GlaxoSmithKline (who still sells Daraprim outside of the US for under a dollar per pill). [ed: Shkreli repeatedly ignored this writer’s requests to clarify Daraprim’s current source, even while machine-gunning retweets by supporters and hurling insults at industry journalists.]
And then, after a whirlwind two days of televised interviews and internet pugilism, Shkreli relented. Whether due purely to public pressure or an intervention by unseen Turing investors, by midday Wednesday Shkreli announced that Turing would determine a new, reduced, price for Daraprim “over the next few weeks.” (His personal Twitter account has also been set to private.)
There the story ends: Ding dong, the twit is dead. The people have spoken. Good has triumphed.
And who cares?
Daraprim is hardly the first case of predatory pharmaceutical pricing practices. Shkreli himself had already waded through the Thiola controversy just a year ago. KV Pharmaceuticals famously secured “orphan drug” status (and seven years of marketing exclusivity) for the pregnancy drug Makena in 2011, raising the price of the compounded agent 100x to $1500 per shot, or $25,000 for a course of treatment.
Shkreli is an easy target, not a story. The tide of exploitative pricing of niche, boutique, and out-of-patent “orphan” drugs is broader and deeper than one very immature-looking man. Let’s take a contrarian stance for just a moment; let’s read past the first paragraph of the story and take Martin Shkreli at his word.
In Shkreli’s Bloomberg interview, he’s incredulous that anyone could question Turing’s motives. “We’re the first company to really focus on this product! [Others were not providing] dedicated patient services […]”
The interviewer questions how Turing can serve patients that it has priced out of treatment. “We’ve put the right protocols in place to make sure that patients get the drug faster and with almost no cost. Previously there were copays for this drug, we have a copay assistance program that will limit that. Previously there was a limited free drug program, we’ve expanded that. Half of our drug we give away for one dollar […] If you can’t afford the drug we’ll give it away totally for free, especially if the patient’s in need or doesn’t have an income.”
You can practically hear the record scratch. “[W]e’ll give it away totally for free.” Didn’t he just raise the cost of the drug by fifty times? This is the same man who, mere moments before promising these free drugs, argued that at the previous price, “you only need less than a hundred pills, so at the end of the day the price per course of treatment — to save your life! — was only a thousand dollars!” Only!
His answer, and the answer to what Turing’s plan was? In Shkreli’s own words: “If we’re having a disagreement with the insurer we’ll send them the drug for free in the interim, until we resolve that with the insurer.”
According to Shkreli this is all in service to a higher goal: eliminating Daraprim. “If you look at diseases like multiple myeloma or multiple sclerosis they’ve been transformed dramatically by profit incentive. [Daraprim]’s from the 1940s; we can make a better drug for this disease.” Why would you gouge patients prescribed a 60-year old WHO Essential Medicine? In order to develop a new, patented essential medicine.
Justifying Daraprim’s $55 million price tag to Turing’s investors had to include a significant price hike to augment its $10 million annual sales. Whether that price increase was in service to long-term R&D or a quick cashout is irrelevant. The investors saw a clear path from the acquisition of a out-of-patent speciality drug to high, immediate returns.
Daraprim costs less than a dollar a pill to the provider. Under Turing’s price increase Daraprim would have cost the patient hundreds of thousands of dollars per course of treatment. If the patient is unemployed, uninsured, or covered by the price-negotiating juggernaut of Medicaid, then distributing free or dollar-a-pill Daraprim wouldn’t even register on the multi-million dollar ledgers of Turing Pharmaceutical.
So, when the patients can’t, who pays?
While pre-existing rare diseases once precluded the acquisition of individual health insurance, now these rare and high-cost sufferers are covered under the ACA’s individual mandate. Previously unprofitable patients have been added to the federally subsidized insurance pool. While previously federal assistance programs would supply needy patients with high cost drugs, with the bargaining power of the US government in place to control the costs of those drugs, more of those patients are moving into the private insurance market — a market mandated to provide a basic, life-saving level of coverage for all of the insured, despite the uncompetitive costs of that coverage.
Drug patents and strict exclusivity in the pharma market are justified by the extreme costs of drug development and testing. FDA-granted market exclusivity essentially obligates the first five years’ of patients prescribed a new treatment to recoup the developer’s costs, before the drug goes into the more affordable generic market.
Shkreli seems to be proposing a new model: corner the market on essential generic drugs and hold current patients to ransom for future R&D funds.
Martin Shkreli may be a bad man. His only goal may be to wring the absolute last drop of profit out of his position as exclusive middleman between Glaxo and the patient, adding zero value to the transaction. Martin Shkreli may be a visionary entrepreneur, manipulating the system to force insurers and health conglomerates to underwrite lifesaving research. Either way, what does it say about the state of the American pharmaceutical market that one man can effectively hold a population of thousands hostage — to the tune of tens or hundreds of millions of dollars per year — over a drug that’s been on the market for over 60 years and costs less than a dollar a pill to make?
While Shkreli’s tone-deaf public response to criticism made him an easy villain in a simple story, the growing pool of mandated health insurance funds presents a tempting target for predatory investors. In 2011 US health insurance companies reported $583 billion in premium revenues. By 2020 that figure is predicted to double to almost $1.2 trillion.
Contrary to both right- and left-wing talking points that the Affordable Care Act would (rightly or wrongly) curtail the health-care industry’s profitability, health care stocks have uniformly outperformed the broader stock market in the five years since the Act’s passage: “UnitedHealth has outperformed the broader stock market by a wide margin since the [ACA] was signed into law in March 2010. The stock also beat the market last year as most of the provisions of the ACA went into effect and consumers started to receive coverage […] [Aetna, Cigna, Humana, and Anthem] have all beaten the S&P 500 over the past five years or so as well.” Insurance and hospital stock valuations spiked again after the Supreme Court’s ratification of the ACA’s insurance subsidies. The market has responded unanimously and positively to federal underwriting of the private health insurance industry.
As the insured population grows, and as insurance is increasingly subsidized by federal dollars, the incentive grows for opportunists like Turing’s backers to find choke points in the supply line to to bleed money out of the growing pool of mandatory medical spending. While denial of life-saving services has always presented the risk of moral hazard in the health industry, a direct payment model generally restricted that risk to what could be extorted from individuals or narrow groups of patients. With more American health spending being funneled through the communal pools of the health insurance industry these sorts of pressure tactics have a much larger, federally-backed pool of wealth to target. Unsubtle 5000% price hikes may arouse public indignation, but more subtle strategies around FDA-mandated marketing exclusivity and lobbying for long term regulatory changes leaves open the door for savvy health industry operators to tap the national insurance industry vein. Isolating individual patients from any particular expenditure will obscure the predatory nature of rising costs.
While federal subsidies may be backstopping the individual mandate, employers are increasingly passing the rising costs of health care and insurance to their employees. In addition to selecting plans with greater deductibles, employers are shifting more of the premium costs to employees as well. According to Kaiser, since 2005 worker premium contributions have increased 33% faster than total premium rate hikes.
While premiums climb worker liability also rises, as “the average deductible that workers must pay for medical care before their insurance kicks in has more than tripled from $303 in 2006 to $1,077 today.” The artificially-inflated costs of boutique drugs like Daraprim may not fall entirely on individual patients in need of them, but the consequent costs of these predatory practices will increasingly be passed on to the middle class and taxpayers.
Much like the federal guarantees that encouraged Wall St. banks to become too big to fail, federal mandates and subsidies are bloating the cash pool of the health insurance industry without the balancing arm of federal price negotiating power. The deputization of private insurance companies as the right hand of federal health care reform has created and compounded real moral hazard in an industry that already leveraged the power of life and death.